Spain's property crash

Builders' nightmare

The housing bust gets ever bigger

SPANIARDS are not used to housing busts. Since property seemed for so long to be a one-way bet, some still find it hard to grasp that prices can ever fall. Recently 2,000 people spent a chilly night sleeping out to sign up for “cheap” new homes due to be built in the Madrid dormitory town of Fuenlabrada. They could have found lower prices on the internet.

The market is dropping fast. Property fairs tout discounts of as much as 60% on new-built homes, or even “buy one, get one free” offers. “All the statistics show a fall,” concedes the housing minister, Beatriz Corredor. Yet pinning down just how big a fall is tricky. Tax-shy Spaniards do not always declare the true selling prices. The government's main index, based on valuers' estimates, shows a 1.3% nominal fall in the third quarter. Most think the true figure is far bigger. The IESE business school talks of prices of existing homes falling by 8%.

Private sellers cannot believe that their homes are losing value, according to Fernando Encinar, communications director at idealista.com, a property website. But developers know the game is up. Some deals are being struck at 20% below advertised prices, he says, a fact few developers are keen to broadcast. They do not want people writing off deposits on half-built homes and shopping around for something cheaper.

The huge number of homes still being built makes the outlook even bleaker. Cranes dot the skyline of Madrid's outer suburbs, promising more pain. Spain has been churning out new homes at near-record rates. Figures for new but unsold homes vary from half a million to over 900,000; the number is rising. In July a five-year record 70,691 new homes were finished. Over the first eight months of 2008 429,711 new homes joined the glut.

Those reassured by the health of Spain's banks have tended to look only at household mortgages. But these are not where the real problem lies. Loan-to-value ratios tend to be safely below 80%. And Spanish mortgages cannot be cancelled by dropping the house keys at the bank: security is provided by all of a borrower's assets—and sometimes those of relatives as well. It is no surprise that most Spaniards do their utmost not to default.

The real worry for banks concerns their loans to builders and developers. More than 40% of property loans go to them, not to householders. And the numbers considered “doubtful” by the Bank of Spain rose by 60% in the second quarter, to reach 2% of all such loans. They now account for more bad loans than do household mortgages. Worse is to come. “Let no one hope for a price fall of 30-40% because, before that, I'll be giving it all to the bank,” the head of the Spanish developers' association, Guillermo Chicote, said recently.

Many construction groups are on their knees. The fifth-largest, Habitat, has joined the giant Martinsa-Fadesa among those filing for administration. Metrovacesa and Colonial have fallen partly into their creditors' hands. Another indebted builder, Sacyr Vallehermoso, has just sold its toll-road arm and is in negotiation to sell its holding in Repsol YPF, Spain's big oil company, possibly to Russia's Lukoil.

Plenty of new homes are now being finished, but few are being started. Those Madrid cranes will soon disappear. Construction has until recently accounted for twice as big a share of GDP in Spain as in other big European countries. It is now shrinking fast—and shedding workers.

The prime minister, José Luis Rodríguez Zapatero, has his eye fixed on unemployment, which rose by over 40% on a year ago to hit almost 3m in November. Spain has Europe's biggest unemployment crisis. The government's latest €11 billion emergency boost is meant to create 300,000 more jobs. But it will not push up property prices. For years Spaniards have grumbled about exorbitant house prices. The market is sorting that one out, at least.